Lake Shore Bancorp, Inc. Reports Results for the Fourth Quarter and Fiscal Year 2008 and Announces Withdrawal of TARP Application

Business Wire, Feb 13, 2009

Net interest income increased by $1.7 million, or 18.1%, to $11.2 million for the year ended December 31, 2008 from $9.5 million for the year ended December 31, 2007. Net interest spread and net interest margin were 2.75% and 3.19%, respectively, for the year ended December 31, 2008 compared to 2.42% and 2.92%, respectively, for the year ended December 31, 2007. Loan interest income grew by $1.1 million, or 7.9%, for the year ended December 31, 2008 compared to the year ended December 31, 2007. Loan interest income was positively impacted by a $17.8 million, or 8.4%, increase in the average balance of loans receivable, net from $210.6 million as of December 31, 2007 to $228.4 million as of December 31, 2008. During 2008, the fair value of our interest rate floor product increased $506,000 compared to an increase of $299,000 in 2007. In addition, $306,000 in interest income was received on the interest rate floor product during the year ended December 31, 2008 compared to no interest income during the year ended December 31, 2007, as the prime rate was below the contractual rate in the floor agreement in 2008 which triggered payments. Interest expense on deposits decreased by $457,000, or 6.6%, for the year ended December 31, 2008 compared to the year ended December 31, 2007, primarily due to lower interest rates being offered on deposit products during 2008 which was partially offset by a 21.8% increase in deposit balances since December 31, 2007. Interest expense on short-term borrowings and long-term debt increased by $103,000, or 4.9%, for the year ended December 31, 2008 compared to the year ended December 31, 2007, primarily due to a $8.4 million increase in average borrowings since December 31, 2007 which was partially offset by a 0.49% decrease in the weighted average interest rate paid on borrowings.

Provision for loan losses increased by $286,000 to $391,000 for the year ended December 31, 2008 from $105,000 for the year ended December 31, 2007. Management deemed the increase was necessary due to an increase in our loan portfolio during 2008 and an increase in non-performing loans, offset by a reduction in the provision for loan losses on the Company's residential mortgage loan portfolio, given the strength of the collateral values for the residential property in Western New York and historical losses on this portfolio.

Non-interest income was $600,000 and $2.0 million, respectively, for the years ended December 31, 2008 and 2007. The decrease was mainly due to the pre-tax $1.9 million other-than-temporary impairment charge recorded in 2008 on certain non-agency asset-backed securities. Excluding the $1.9 million impairment charge, the Company would have recorded non-interest income for the year ended December 31, 2008 of $2.5 million, an increase of $532,000, or 26.6%, over the year ended December 31, 2007. This increase was mainly due to a $526,000 increase in service fees in 2008.

Non-interest expense increased by $483,000, or 5.3%, to $9.6 million for the year ended December 31, 2008 compared to $9.1 million for the year ended December 31, 2007. Advertising expense increased by $174,000, or 76.3%, primarily due to increased television, print and sponsorship advertising in our Erie County market area and due to expenses incurred to advertise the opening of our new branch office in Kenmore, New York during December 2008. Occupancy and equipment increased by $94,000, or 7.3%, for the year ended December 31, 2008 compared to the year ended December 31, 2007 primarily due to the acquisition of a new branch office and the interior remodeling of the main branch office during 2008. Data processing expenses increased by $74,000, or 15.2%, to $560,000 for the year ended December 31, 2008 due to increased costs for ATM and debit card transactions, including the implementation of a Business Debit Card for our commercial customers. Salaries and employee benefits expenses increased by $51,000, or 1.0%, for the year ended December 31, 2008 compared to 2007 due to annual salary increases and the addition of two lending officers, offset by decreases in salary and benefit costs due to the retirement of an executive officer and a director in 2008. Expenses related to FDIC insurance increased by $28,000 for year ended December 31, 2008 compared to 2007 as the Company had fully utilized the $174,000 one-time assessment credit granted by the FDIC and applied against Company premiums since June 2007. Training and travel expenses also increased by $21,000 for year ended December 31, 2008 compared to 2007 due to the increase in the Company's reimbursable mileage rate and the volume of business travel by the Company's lending officers.